McCain's Health Care Plan: Gut Employer-Based Insurance

This is the first entry in a series examining John McCain's health proposals and how they have been covered in the press.

A few years back, I attended a meeting at the Rayburn Building on Capitol Hill to hear conservative think tanks, including the Galen Institute and the Heritage Foundation, argue that employer-provided health insurance ought to be eliminated. The audience -- mostly Hill staffers, industry reps, lobbyists, and journalists -- asked a lot of questions as health care specialists made economic and political arguments about why the tax exclusion for the value of employer-paid health insurance had to go. It would be the first step in ending employer-sponsored coverage. I remember two things from the meeting -- the free chicken sandwiches everyone devoured, and how unthinkable such an idea would be. Were they crazy?

Like so many once-unthinkable ideas which have come from conservative think tanks over the last two decades, like privatizing Medicare or creating health savings accounts, this one began to worm its way into Beltway consciousness. Oregon Sen. Ron Wyden and Rep. Bob Bennett of Utah even took the bold steps of writing bills that would wipe out employer-provided coverage in favor of a system where individuals buy their own policies through state-run pools.

Given this history, it was hardly surprising when John McCain made the attack on employer-provided insurance his health-care centerpiece. He would eliminate the tax exclusion workers get for health benefits their employers provide; in other words, he would require workers to pay income taxes on the value of their health insurance, while companies would still get to deduct the costs for providing that coverage. In its place, McCain would offer families a tax credit of $5000 -- and individuals a credit of $2500 -- to buy their own insurance. (They'd get the credit even if they didn't pay taxes.) So far, the press has failed to examine what's at stake here for workers and their bosses -- that, in the long run, employer coverage could disappear, and that, in the short run, they may have to pay taxes on some portion of their health benefits, no matter who wins in November. In effect, it's an unspoken tax increase which has yet to surface in campaign conversation.

Too many stories have, in one or two lines, described the tax exclusion proposal as a "radical" notion peddled by some policy research shops, and let it go at that. But there are a lot of angles to explore here: the political angle, the economic angle, the business angle, and the people angle. For example, instead of just mentioning the tax credit, reporters could explain why a $2,500 credit might buy more insurance in the individual market for a young, healthy 26-year-old than for a 56-year-old with a couple of chronic conditions. Premiums in the individual market, where McCain hopes to send refugees from employer group plans, are based on age. Older people pay more, so a flat credit might not buy as much for them. And just how far will the credit go, anyway, considering that family policies now cost upwards of $12,000 a year?

Earlier last month, an Associated Press story moved beyond the standard treatment, and, in seventeen paragraphs, attempted to explain McCain's central thesis. The story, a workmanlike effort, nibbled around the edges of the economic and the business issues. But the AP and others need to do more. The AP posed one of the relevant questions, asking just how many employers would drop coverage for their workers. It answered the question by quoting Washington experts, who explained how young, healthy workers might be tempted to leave the employer group and buy their insurance in the individual market. If that happens, those left in the employer group would be older (and, likely, sicker), causing premiums to skyrocket even more than they do now. To use insurance jargon, "a death spiral" results.